Now that the Oly with kit lens is selling for or close to the same price as compacts such as Canon G15, Olympus XZ-2, Fuji X20, Nikon P7700, Pentax MX-1, and others which are you looking at?

I have the e-pm1 and the e-pl1 and recently bought the LX7 when it was offered for $299 since I was also curious how it'd measure up to my m4/3 cameras. The short answer; it didn't. While good for a point and shoot, the LX7 image quality, especially high ISO (i.e. ISO400+ and even ISO200 sometimes) indoors is simply not acceptable. Low contrast detail (e.g. hair) is a mushy mess at that ISO level in regular indoor light (i.e. not particularly dim) and the sensor/image processor resolving ability is average at best in most light, at least for jpegs, even with the sharp lens on the LX7. I returned it.

But you don't HAVE to shoot higher than ISO 400 because the LX7 has such a faster lens than the kit lens on the m43 camera. In fact, on account of the fast lens, the LX7 is actually a better low-light camera than then E-PM1 with the kit lens.

And you should really shoot RAW if you want to get the best out of your cameras. Default JPEGs are tuned to what the average point-and-shoot consumer wants and not what serious photographers want. The E-PM1 has pretty poor JPEGs because of overdone noise reduction in shadows.

Now as I said before, you CAN get a little better IQ from even an old generation m43 under SOME circumstances, but it's close.

Oh, I HAVE to shoot at/higher than ISO 400 often in normal indoor light, especially when using the full extent of the zoom (to shoot portraits for instance). Plus you misread my comment; image quality sucks AT ISO 400 and higher. Besides, and as I said, even at ISO 200 image quality is sometimes iffy indoors. So the problem is not only at ISO levels higher than 400.

I shoot my m4/3 cameras with primes and I set noise reduction to -1/-2. The jpegs produced by them are orders of magnitude better than those I had from the LX7. It's not even close.

I know RAW gets the best out of any camera, which goes without saying, but the m4/3 cameras produce great jpeg AND RAW pics. With the LX7, shooting RAW is almost mandatory and even then the quality of the results is often merely passable in regular indoor light.

All of that is, of course, imo. If you like the quality you're getting from your LX7, then all the power to you. We'll have to agree to disagree.

Now you are talking about prime lenses and changing the all subject of the conversation.

I presume you are shooting portraits with the 45mm f/1.8 lens, and that costs as much as the entire LX7 camera which includes the zoom lens. You are really comparing apples and oranges here. The original question was about when you spend the same for a compact vs spending the same for a cheap m43 setup, which wouldn't include an expensive prime lens.

You don't seem to realize that you can buy the epl1 and an excellent prime like the panny 20mm or the 45mm around the $500 budget the op indicated. You also don't seem to realize that the LX7 is currently offered at $450 (at bhphoto, which is where I bought it for $299 in December). So forget about apples and oranges, it's bananas to buy the LX7 when you can get the epl1 + the panny 20mm for similar money, if the best image quality for the buck is your main goal.

Having said that, even if the LX7 was still selling for $299, I'd strongly recommend spending the extra money to get the aforementioned m4/3 kit; the image quality improvement is more than worth the price difference.

The 45mm costs $399 alone, so it's a little more than $500 to buy camera and lens.

And it wasn't what I thought we were comparing.

Yes, E-PL1 can take "better" images if it has the 45mm lens on it, at THAT ONE focal length.

But I don't think that's what the OP was talking about.

I would say that overall, the LX7 is a BETTER camera than an E-PL1 with a 45mm lens, because the LX7 has better controls plus it can take pictures at all focal lenghths between 24mm and 90mm (equivalent), and it's smaller and can fit in your pocket.